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Can an Industrial-Focused GE Surprise on Q3 Earnings?

Industrial goods manufacturer General Electric CompanyGE is scheduled to report its third-quarter 2015 results before the opening bell on Oct 16. In the last reported quarter, General Electric's operating earnings exactly matched with the Zacks Consensus Estimate. Let's see how things are shaping up for this announcement.

Key Factors in the Third Quarter

General Electric is actively continuing with massive restructuring initiatives in its operating portfolio in order to create a simpler and nimbler company with a re-focus on core operations. In accordance with Chairman and CEO Jeff Immelt's vision to transform the company to an industrial-focused firm, General Electric has vouched to divest most of the financial units under GE Capital. The only financial operations that would be retained by the company will include financing verticals like GE Capital Aviation Services, Energy Financial Services and Healthcare Equipment Finance. These units directly relate to the core industrial operations of the company and will thus form an integral part of its corporate activities.

During third-quarter 2015, General Electric announced asset sales totaling $27 billion in ending net investment (ENI), bringing its year-to-date tally to $95 billion. The company is thus well on track to reduce GE Capital's ENI by $100 billion by 2015 end, and expects to be mostly done with its exit strategy by the end of 2016. In fact, the company has even raised its 2015 target for GE Capital asset sales from $100 billion to a range of $120 billion to $150 million.

By and large, General Electric's business units have been selling at par or somewhat above par, as they are performing assets and not distressed. Also, there is significant demand for these assets from financial firms that have very few good buying opportunities.

The transactions are expected to realign the corporate strategy of the company to a manufacturing-based entity with emphasis on big-ticket items such as aviation engines, drilling machines, generators, medical equipment and scanners. With these restructuring initiatives, General Electric expects operating earnings from the industrial business to aggregate over 90% of its total operating earnings by 2018, up from 58% in 2014.

The company expects that the adverse impact of the divestments would be nullified by share buybacks over the exit period. Management has authorized a new share repurchase program worth $50 billion to execute this strategy, reducing its outstanding share count to 8-8.5 billion by 2018. About $35 billion will be made available through dividend payments of GE Capital to its parent company. General Electric is likely to return over $90 billion to shareholders through dividends and share buybacks through 2018.

During third-quarter 2015, General Electric also announced that it is set to receive the green signal from the European Union for its $14-billion proposed bid to acquire Alstom's energy assets. The Alstom deal promises excellent return on capital, supply chain efficiencies and cost synergies. It also marks the biggest acquisition ever for General Electric and would significantly expand its geographic footprint in a recovering Europe. Alstom's energy assets will be integrated into General Electric's power generation unit, thus making it one of the biggest manufacturers of power plant equipment globally. In addition to incremental revenues, the deal further reinforces General Electric's strategy to focus on core industrial operations.

Earnings Whispers

Despite the best attempts to restructure its business, our proven model does not conclusively show that General Electric is likely to beat earnings this quarter as it lacks the key ingredients for a success recipe.

Zacks ESP: Expected Surprise Prediction or Earnings ESP , which represents the difference between the Most Accurate estimate and the Zacks Consensus Estimate, is currently pegged at 0.00%. This indicates a likely in-line earnings for the shares.

Zacks Rank: General Electric's Zacks Rank #3 (Hold) when combined with 0.00% ESP reduces the predictive power of ESP. Note that stocks with a Zacks Ranks of #1 (Strong Buy), #2 (Buy) and #3 have a significantly higher chance of beating earnings. The Sell rated stocks (#4 and #5) should never be considered going into an earnings announcement, especially when the company is seeing negative estimate revisions momentum.

Other Stocks to Consider

Here are some companies you may want to consider as our model shows that these have the right combination of elements to post an earnings beat this quarter:

Allegiant Travel Company ALGT , earnings ESP of +3.50% and Zacks Rank #1.

The Chubb Corporation CB , earnings ESP of +13.51% and Zacks Rank #1.

Hawaiian Holdings Inc. HA , earnings ESP of +8.70% and Zacks Rank #1.

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CHUBB CORP (CB): Free Stock Analysis Report

GENL ELECTRIC (GE): Free Stock Analysis Report

HAWAIIAN HLDGS (HA): Free Stock Analysis Report

ALLEGIANT TRAVL (ALGT): Free Stock Analysis Report

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The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.


The views and opinions expressed herein are the views and opinions of the author and do not necessarily reflect those of Nasdaq, Inc.

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